The IRS Has a Time Machine!

Sounds fantastic, but it’s true!  On October 14th, the IRS announced that they will give us more time to deduct a disaster loss BEFORE the year of the loss.  In other words, you get to go back in time!  This has been available for a while, but today’s announcement gives you more time to make the election.

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How it works

Let’s say Jack and Jill timely filed a joint tax return for calendar year 2015.  Then, in October of 2016 their beach house on Hilton Head Island, Beaufort County, South Carolina, suffers severe damage due to Hurricane Matthew.hurricane-60550_640

According to the Internal Revenue Code and today’s IRS announcement (called “Rev. Proc. 2016-53”), they elect one of two options:

  1. They can deduct their loss on their personal income tax return for 2016, when they file it in 2017; or
  2. They can elect to go back in time, and take the loss on their 2015 tax return. Since they already filed that return, they can file an amended tax return.

Prior to the IRS’s announcement, the deadline to make the election would coincide with the due date of the return for the year of the loss.  But Rev. Proc. 2016-53 sets a new deadline: six months after the original due date of the tax return for the year of the loss.  So in Jack and Jill’s example, they would have until October 18, 2017. (As a side note, the due date for 2016 personal income tax returns appears to be April 18th – the IRS Code says if a due date falls on a Saturday, Sunday or Holiday, the due date is extended to the next business day.  In 2017, April 15th falls on a Saturday, and the following Monday is Emancipation Day, so the due date is extended to Tuesday, April 18th.  A similar  situation happened in 2016.).

What you need to travel back in time…

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  • First – you need a disaster loss (not that anyone would want one!). A disaster loss is a special type of casualty loss.  Not only does it have to be a loss that arises from fire, storm, shipwreck or other casualty (your garden variety type of casualty loss), but it must be caused by a disaster declared by the President of the United States as needing assistance by the Federal government, and must have occurred in the Federally declared disaster area at the time of the loss.  For example, the President declared Beaufort County, South Carolina a disaster area following the devastation caused by Hurricane Matthew.
  • Second – You need to elect to take the loss in the prior year. For that you need at least two IRS Formstaxes-1032644_640
    • Form 4684; and
    • Either:
      • Your regular income tax return if you haven’t filed it for that year (for example, Form 1040); or
      • Form 1040X Amended US Individual Income Tax Return (there are similar “X” forms to amend business returns).
  • Third – You provide an “election statement” containing
    • The name or a description of the disaster and the date or dates of the disaster that caused your loss; and
    • The address, including the city, town, county, parish, State and zip code of where the damaged property was located at the time of the disaster.

If you are taking the election on your original return, the election statement is provided on Form 4684 which gets attached to your return.  If you are filing an amended return, the election statement can be on Form 1040X, Form 4684, or as an attachment.

When to File

        Whether you file an original or amended return to take the disaster loss, the due date to file is 6 months from the due date of the return for the year the loss took place.  Ordinarily, if you don’t file your return by the original due date, you have to file an extension.  Not so, if you are filing with this election, and you file within the 6-month deadline.

What if I Change My Mind?arrows-539917_640

Today’s Rev. Proc. 2016-53 also allows you to change your mind about which year to claim your loss.

For example, let’s say Jack & Jill prepare their own tax return and decide to take the disaster loss deduction on their previously filed 2015 return, so they file an amended return.  In preparing their 2016 return they realize they would have a great tax savings if they take the deduction on their 2016 return.

They could file a Form 1040X for 2015 removing the election for that year, and file a new or amended return for 2016 as the case may be, and elect to take the disaster loss on that return.

You have 90 days after the due date of the election to file the revocation. In Jack & Jill’s case, they would have until October 18, 2017 to amend the 2015 return and elect to claim the deduction on their 2016 return.

You will be responsible for the additional taxes, plus interest for the removal of the deduction in one of the tax returns, but you will get some or all of it back with the deduction being moved to the other tax year return.

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To remove a disaster loss deduction from a return, you must include a revocation statement with the following information:

  1. A statement clearly showing that the election is being revoked;
  2. The name or a description of the disaster and the date or dates of the disaster that caused your loss; and
  3. The address, including the city, town, county, parish, State and zip code of where the damaged property was located at the time of the disaster.

Conclusion

So, if you find yourself the victim of a disaster, there is at least a silver lining when it comes to your income taxes.   For a complete copy of the IRS pronouncement, go to Rev. Proc.  2016-53. Go to the Temporary Regulations for additional information.

Of course, this article is for information purposes only, and is not intended to be legal advice.  Before taking any action, be sure to consult with your favorite tax planner or preparer.

I’m Ed, and I’m just saying…

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Posted by: edburdzinski on October 15, 2016